Description
Paramount is the most compelling value story left among the junior and intermediate producers in the booming Canadian oil & gas space. Based on P/CF multiples and significant production ramp ups, the investment has attractive upside potential. But the real value in Paramount is hidden: the company's non-producing assets alone are worth more than 50% on top of today's share price, and will drive significant production ramp ups in the next 12-24 months that aren't yet accounted for in analyst estimates.
On a sum-of-the-parts basis, Paramount, which closed at $CAD26.58 on August 16, 2005, can easily support a $50 stock price. At the peer group mean 7.1x P/CF multiple, a conservative $US6.72/Mmcf AECO natural gas price and a $US50.38 WTI crude price, Paramount's producing assets alone are worth $31.09. The assessment of its 2,840,000 undeveloped acres of land using a low, $CAD100/acre fire sale price adds an additional $CAD4.29 of value per share. Last (but definitely not least), the value of its recoverable oil sands reserves in Athabasca (estimated to be between 1.1 and 2.0 Bboe of bitumen) is $14.77 per share (assuming 1.3 Bboe reserves and the $0.75/Boe price Total recently paid to acquire Deer Creek Energy). In aggregate, Paramount's conservative fair value per share in 2006 is $50.15, or 89% higher than today's closing price.
Paramount Res Ltd. (TSX:POU)
August 15, 2005 Price: $CAD 26.58
Fair Price 12-18 months: $47.44 - $58.37 (Upside: 79-120%)
Table of Contents:
SECTION A: Company Description
SECTION B: Company Snapshot and Key Facts
SECTION C: Investment Conclusion
SECTION D: Valuation
SECTION A: Company Description: Paramount Resources, Ltd. is a Canadian junior E&P company involved in the exploration, development, production and distribution of natural gas, oil, and natural gas liquids. It owns and actively explores over 3 million net acres of undeveloped land in Alberta, British Columbia, the Northwest Territories, Saskatchewan, Montana, North Dakota, and California, where it hopes to locate and exploit oil & gas reserves. Its annual capital programs contribute to the seismic testing, drilling, completion and tie-in of wells needed to produce oil & gas on its five core properties. It also engages in two unconventional resource-style plays, including the steam-assisted gravity drainage of bitumen from oil sands in Alberta, Canada, and the extraction of natural gas from coal bed methane. Currently, the company is 80% levered to natural gas.
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SECTION B: Company Snapshot and Key facts:
1.) All dollar values in this report are, unless otherwise specified, in Canadian currency. An exchange rate of $CAD 1.00 = $USD 0.82 was applied when necessary. Measurements in cubic feet (cf) refer to natural gas. Measurements in barrels (bbls) refer to oil and natural gas liquids. Barrels of oil equivalent (Boe) are used to consolidate all three commodities, with a conversion ratio of 6 Mcf:1 boe for natural gas. Lastly, all numbers are net of the spin-off of Trilogy Energy Trust unless otherwise stated.
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2.) Capitalization As of August 16, 2005
($mm except per share)
Share Price: 26.58
Shares Outstanding: 66.02
Market Capitalization: 1,754.71
Less: Cash -
Plus: Debt
8.5% US Senior notes (2013) 262.90
7 7/8% Senior Notes (2010) 0.90
Revolver ($136mm) 100.90
Total Debt: 364.70
Less: Value of Trilogy Asset: 294.60
Net Debt: 70.10
Total Enterprise Value: 1,824.8
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3.) Key Assumptions: 2005E 2006E 2007E 2008E
Commodities:
AECO Gas (US$Mcf) 7.00 6.80 6.50 6.00
Nat. Gas (CAD$/Mcf) 8.53 8.29 7.92 7.31
WTI (US$/Boe) 55.00 53.00 50.00 45.00
WTI (CAD$/Boe) 7.05 64.61 60.96 54.86
Oil/NGLs (CAD$/Boe): 60.55 58.61 55.96 49.86
Corporate Price (CAD$/Boe): 52.59 50.92 49.12 45.60
Production + CF:
Average Production (Boe/d): 25,253 28,444 36,262 48,095
Cash Flow ($mm): 279.20 298.16 373.63 453.99
Cash Flow per share: 4.23 4.52 5.66 6.88
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4.) Consolidated Valuation 2005E 2006E 2007E 2008E
Production Value @7.0x P/CF 1,954 2,087 2,615 3,177
Undeveloped Land 300 357 420 487
SAGD Oil Sand Reserves 825 825 825 825
Total Value: 3,079 3,269 3,860 4,490
Value/Share: $46.65 $49.53 $58.48 $68.02
Upside Potential: 73% 83% 117% 152%
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SECTION C: Investment Conclusion:
Three factors make Paramount Resources a compelling investment. First, the stock is trading at a discount to its fair value. Second, the company will achieve significant growth in production and cash flow in both the near and long terms. Third, Paramount has a rich asset base with over 3 million net acres of undeveloped land and 57 billion barrels of oil equivalent of proven and probable reserves. These assets include 2 unconventional resource play opportunities consisting of 160,000 acres of oil sands in the Athabasca region of Alberta, and a proven coal bed methane play in Horseshoe Canyon. Unconventional resource plays will significantly improve Paramount’s operational profile over the next two years.
Paramount is trading at 6.2x 2006E P/CF. Duvernay (TSX:DDV), its closest peer and one of the more fully valued companies in the sector, is trading at 8.2x 2006E P/CF, while the peer group mean and median are 7.5x and 7.8x, respectively. Paramount is trading at 1.5x 2006E consensuses P/NAV, while DDV is trading at 2.5x, and the peer group mean and median are at 1.94x and 1.68x. Additionally, the considerable value of Paramount’s proven, undeveloped assets (PUDs), including its 160,000 acres of high-value oil sands in Athabasca, has not yet been factored into the price of the stock. At current levels, investors are buying paramount at discounted multiples to cash flow, and are recieving its undeveloped assets for free.
Paramount’s operations focus on 5 core areas: West Kaybob, Grand Prairie, Fort Liard/Northwest Territories, Northwest Alberta, and Southern Alberta. Historically, Paramount has developed a core property until it is self-financing, then spun it off into a royalty trust structure. To date, Paramount has successfully converted three of its core properties into trusts. In the future, the sale of a self-financing property could potentially garner a higher multiple than a trust conversion. In order to offset the divestiture of major core assets, Paramount regularly acquires large quantities of unexplored crown lands in hopes of finding new reserves. Currently, with an asset base consisting of over 3 million acres of undeveloped land, 57 billion barrels of oil equivalent (boe) of proved and probable reserves, and a large diversified portfolio of proven but undeveloped drilling opportunities, the company is well-positioned for sustainable expansion.
Paramount is growing substantially in all operating segments, with sizeable production increases coming from its conventional E&P properties and unconventional CBM and SAGD projects. Each of four planned SAGD projects alone could more than double Paramount’s current production levels, with potential capacities of 20,000-30,000 Boepd each. 25 preparatory oil sands exploration wells have been drilled to date, and Paramount will receive permits for drilling in 2006. The company should be ready to construct and commercialize its pilot SAGD plant by the 2H2007. The first three of four SAGD projects will be done with partner companies in order to mitigate operational risk involved with oil sands operations. Paramount will contribute portions of its existing 160,000 acre land base in Athabasca to the joint ventures, while its partners will contribute the necessary capital. Future capital programs will continue to focus on E&P projects.
Paramount’s unconventional CBM operations are expected to yield sizeable and sustainable levels of production this year. The company is on track to drill 88 CBM wells this year, which will have a heavy impact on production levels. However, the biggest chunk of Paramount's $350mm 2005 capital program will be focused on its the conventional West Kaybob core area, which is on schedule to be self-financing by mid-2006. In July, Paramount issued a $40mm flow-through share offering to increase West Kaybob's capital program to $90mm from its original $40-50mm allocation. The spin-off or sale of West Kaybob will fetch a premium multiple, immediately increasing shareholder value. There is also speculation that Paramount has begun acquiring a new, high-impact core property in North Dakota and Wyoming. Once a rig is obtained for the area in late 2005, drilling of 50 net wells will begin, each of which will, after initial production spikes, average 100 boepd for an aggregate 5,000 Boepd increase in ouput (25% of 2005E average) that hasn't been accounted for in estimates of production and cash flow. The company also has several thousand boepd behind pipe in the Northwest Territories that will come on stream once the Mackenzie Pipeline is built, as well as a high-impact project in British Columbia that was only passingly mentioned in its 1Q2005 10-Q. Additionally, Paramount’s stock price does not yet factor in any value for the company’s valuable, non-producing, undeveloped assets, especially its 160,000 acres of oil sands in Athabasca. The street is just now waking up to the value of these assets and factoring them into valuations and price targets (for example, on August 5, CIBC World Markets Inc. came out with a $38 price target based on the value of recoverable oil sands reserves in Athabasca).
All of these hidden opportunities will be incorporated into the share price over time as federal drilling permission is granted and financing is acquired and utilized. Over $2 billion will be spent to complete all current operating projects. With very little debt, a $130mm revolver, a $30mm annual payout from Trilogy, and excess cash flow generation, Paramount will have no problem financing future operations. The company is, at both a value and a growth play, with significant upside in its cash flow, hidden projects, and undeveloped assets.
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SECTION D: VALUATION
Exhibit 1: Commodity, Pricing, and Multiple Forecasts & Assumptions:
Ex. 1, Step 1: P/CF and TEV/CF multiples are the most common metrics used to value the oil & gas companies. Netbacks (margins) are directly related to corporate price, which is the weighted price recieved for each boe of production. Paramount is 80% natural gas leveraged, so its cash flow is most affected by AECO spot prices (though it tends to trade with crude on a daily basis). To offset cash flow risk created by the spin off of Trilogy Energy Trust in April, Paramount is locked into 7 financial contracts, guaranteeing specific corporate prices for a portion of its production. Currently, 45% of Paramount’s natural gas production is hedged through October, and 30% through the first quarter of 2006. The following chart shows the details of each hedge. Management has stated that Paramount will be a price taker once these contracts have expired, indicating their bullish outlook on energy prices.
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Total Corporate Price (CAD$) AECO ($US/Mmcf) WTI ($US)
50.00 6.72 50.38
53.00 7.11 53.35
56.00 7.51 56.32
59.00 7.90 59.28
62.00 8.30 62.25
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Current Hedges in Place: Quantity (Mmcf;Bbl) Price ($CAD) Date
AECO Fixed Price 55 7.58 7/05-10/05
AECO Fixed Price 9 8.73 11/05-3/06
AECO Fixed Price 9 8.71 11/05-3/06
AECO Fixed Price 18 8.09 11/05-3/06
WTI Fixed Price 1,000 57.67 3/05-9/05
WTI Fixed Price 1,000 57.02 3/05-12/05
WTI Fixed Price 1,000 65.14 10/05-3/06
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Ex.1, Step 2: The following table breaks down estimated production averages for each core operating segment from 2005 to 2008, net of Trilogy. Forecasted production levels are conservative interpretations of guidance provided by the company, and are consistent with other analysts' numbers. Production upside exists in SAGD, which is likely to come on stream in late 2006 with significant production levels coming on stream in 2007. West Kaybob is expected to be self-financing at 7,500 Boepd by the middle of 2006, with a good chance to outstrip the 11,417 boepd level forecasted for 2007. Meanwhile, CBM drilling in Southern Alberta will continue in 2006, while the following estimates only account for the results of projects begun in 2005. Even more tangible is the fact that these estimates are net of Trilogy, which produces about $40mm worth of revenue each quarter, and contributed to Paramount's first quarter numbers.
POU Production Average Rates (net of Trilogy)
FY2005E 2006E 2007E 2008E
West Kaybob:
Nat. Gas (MMcf/d): 26 39 63 88
Oil/NGLs (Bbls/d): 993 1,000 1,000 1,000
Boe/d: 5,326 7,500 11,417 15,583
% Total Production: 21% 26% 30% 32%
Grande Prairie:
Nat. Gas (MMcf/d): 27 29 30 31
Oil/NGLs (Bbls/d): 362 362 362 362
Boe/d: 4,862 5,112 5,279 5,445
% Total Production 19% 18% 14% 11%
NW Alberta:
Nat. Gas (MMcf/d): 27 27 29 30
Oil/NGLs (Bbls/d): 950 950 950 950
Boe/d: 5,450 5,450 5,700 5,867
% Total Production 22% 19% 15% 12%
Liard (NWT,BC):
Nat. Gas (MMcf/d): 30 30 31 32
Oil/NGLs (Bbls/d): 50 50 50 50
Boe/d: 4,967 5,050 5,133 5,300
% Total Production 20% 18% 13% 11%
Southern Alberta:
Nat. Gas (MMcf/d): 18 22 24 25
Oil/NGLs (Bbls/d): 1,383 1,400 1,400 1,400
Boe/d: 4,300 4,983 5,317 5,483
% Total Production 17% 18% 14% 11%
NE Alberta/Heavy Oil:
Nat. Gas (MMcf/d): 2 2 2 2
Oil/NGLs (Bbls/d): 15 15 5,000 10,000
Boe/d: 348 348 5,333 10,333
% Total Production 1% 1% 14% 22%
Total Nat. Gas (MMcf/d): 129 148 177 206
% Nat Gas: 85% 87% 77% 71%
Total Oil/NGLs (Bbls/d): 3,753 3,777 8,762 13,762
% Oil/Liquids: 15% 13% 23% 29%
Total Production (Boe/d): 25,253 28,444 38,179 48,012
Growth From Last Period: 6% 13% 34% 26%
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Ex. 1, Step 3: The following comp chart compares Paramount and it peer companies based on relevant ratios and financial data. All of the companies on this list are considered Canadian Junior or intermediate producers, or are involved in unconventional resource plays. In terms of size, drilling similarities, and North American focus, Paramount’s best comps are Duvernay and Compton. Both of these companies trade at a premium to their peers, but Paramount should trade at or around the group means and medians for each multiple due to its 54% management ownership.
Industry Comps:
Consensus
Ticker P/CF05 P/CF06 EV/CF05 EV/CF06 EV/Boepd05 EV/Boepd06 P/NAV
BVI 22.1x 4.0x 19.4x 3.5x 91,147 58,636 1.4x
CMT 7.2x 6.2x 8.9x 7.7x 68,410 58,376 1.7x
DDV 14.0x 8.2x 14.5x 8.5x 124,861 99,889 2.5x
NKO 18.8x 15.2x 18.1x 14.6x 198,472 94,246 N/A
NVA 7.8x 5.9x 8.4x 6.4x 73,550 51,002 N/A
POU 6.6x 6.2x 8.4x 7.9x 93,822 83,298 1.5x
Peyto 11.3x 8.0x 12.1x 8.5x 136,595 112,461 N/A
ProEx 3.1x 3.1x 3.0x 3.0x 117,162 71,493 2.5x
Real 7.4x 5.8x 7.7x 6.1x 76,108 55,980 1.4x
High 22.1x 15.2x 19.4x 14.6x 198,472 112,461 2.5x
Low 3.1x 3.1x 3.0x 3.0x 68,410 51,002 1.43x
Mean 11.4x 7.1x 11.6x 7.5x 113,002 78,675 1.94x
Median 9.6x 6.2x 10.5x 7.8x 105,492 77,395 1.68x
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Exhibit 2: Per Share Estimates Based on Cash Flow Analyses
Ex. 2, Step 1: The following matrixes show Paramount’s per share prices using 6, 6.5, and 7.0x P/CF multiples at a relevant range of commodity prices. Refer to the assumptions chart in exhibit 1 to see the commodity prices in $USD that are factoredinto each corporate price. As of August 12, 2005, Paramount is trading at $27.00. A $62.00 corporate price in 2006 and a 7.0x P/CF multiple (which would put Paramount roughly on par with Duvernay) equates to 56% of upside on Paramount’s producing assets alone.
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At 6x P/CF Multiple FY2005E FY2006E FY2007E FY2008E
Share Price when Corp.
Price (CAD$/Boe)=
50.00 $25.05 $26.28 $27.34 $27.93
53.00 27.13 28.62 29.71 30.34
56.00 29.22 30.96 32.08 32.75
59.00 31.30 33.30 34.45 35.16
62.00 33.38 35.64 36.82 37.56
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At 6.5x P/CF Multiple FY2005E FY2006E FY2007E FY2008E
Share Price when Corp.
Price (CAD$/Boe)=
50.00 $27.14 $28.46 $29.61 $30.26
53.00 29.39 31.00 32.18 32.87
56.00 31.65 33.54 34.75 35.48
59.00 33.91 36.08 37.32 38.09
62.00 36.16 38.61 39.89 40.70
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At 7x P/CF Multiple FY2005E FY2006E FY2007E FY2008E
Share Price when Corp.
Price (CAD$/Boe)=
50.00 $29.23 $30.65 $31.89 $32.59
53.00 31.66 33.39 34.66 35.40
56.00 34.08 36.12 37.43 38.21
59.00 36.51 38.85 40.19 41.02
62.00 38.94 41.58 42.96 43.83
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Ex. 2, Step 2: The investment is equally compelling on an EV/CF basis, where Duvernay trades at 8.5x EV/CF 2006E, and the peer mean is 7.5x EV/CF 2006E. Here, assuming a $62.00 corporate price and a 7.5x multiple, there is 62% upside to Paramount’s current price in 2006.
At 6.5x EV/CF Multiple FY2005E FY2006E FY2007E FY2008E
Share Price when Corp.
Price (CAD$/Boe)=
50.00 $25.88 $26.85 $28.80 $31.46
53.00 28.13 29.39 31.37 34.07
56.00 30.39 31.93 33.94 36.68
59.00 32.64 34.47 36.51 39.28
62.00 34.90 37.00 39.07 41.89
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At 7x EV/CF Multiple FY2005E FY2006E FY2007E FY2008E
Share Price when Corp.
Price (CAD$/Boe)=
50.00 $27.96 $29.04 $31.08 $33.79
53.00 30.39 31.78 33.84 36.60
56.00 32.82 34.51 36.61 39.40
59.00 35.25 37.24 39.38 42.21
62.00 37.68 39.97 42.14 45.02
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At 7.5x EV/CF Multiple FY2005E FY2006E FY2007E FY2008E
Share Price when Corp.
Price (CAD$/Boe)=
50.00 $30.05 $31.23 $33.35 $36.12
53.00 32.65 34.16 36.32 39.12
56.00 35.26 37.09 39.28 42.13
59.00 37.86 40.02 42.25 45.14
62.00 40.46 42.94 45.21 48.15
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Exhibit 3: Net Asset Value Calculation & Valuation
Paramount’s 57,000 mboe of proved and probable reserves and 3 million acres of land (net of high value oil sands acreage) are worth $22.86. The price deck listed on Page 1 was used for this calculation
Net Asset Value Calculation
2005 2006 2007 2008
Oil, Gas, NGLs (mmboe)
Proven + Probable
Open: 57.00 69.02 80.74 91.05
Revisions:
Purchases:
Extensions, Discoveries: 20.00 20.00 20.00 20.00
Sales:
Subtotal Gross Additions: 20.00 20.00 20.00 20.00
Production: 7.98 8.28 9.69 10.93
Close: 69.02 80.74 91.05 100.12
Extraction Rate: 0.16 0.15 0.16 0.19
Undeveloped Land ('000 acres): 3,000 3,250 3,500 3,750
Unit Value Proven + Probable Boe: 18.65 17.19 17.53 17.03
Average Land Value: 100 110 120 130
Total Reserve Value: 1,287 1,388 1,596 1,705
Total Land Value: 300 57 420 487
Gross Asset Value: 1,587 1,745 2,016 2,192
Net Debt: 78 101 49 -84
Net Asset Value: 1,509 1,644 1,967 2,292
Net Asset Value Per Share: $22.86 $24.91 $29.81 $34.72
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Paramount also estimates that it has 1.1-2.0 bboe of recoverable reserves under its 160,000 acres of oil sands in Athabasca. The following matrix shows the value of these reserves in the ground today. Here, we used a range of prices centered around the $0.75/boe price that Total paid in early August to acquire Deer Creek Energy, another Canadian producer, for $1.3 billion. BASED ON THAT TRANSACTION, PARAMOUNT'S NON-PRODUCING OIL SANDS ASSETS ARE WORTH AT LEAST AN ADDITIONAL $12.50/SHARE TODAY. Paramount Resources’ net asset value including the oil sands is $35.36, or an 33% premium to its current trading price.
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Net Asset Value of Oil Sands Property
Recoverable Reserves (mboe)
Price per share @ ($/boe in ground) 1100 1400 1700 2000
0.65 $10.83 $13.78 $16.74 $19.69
0.70 11.66 14.84 18.03 21.21
0.75 12.50 15.91 19.31 22.72
0.80 13.33 16.97 20.60 24.24
0.85 14.16 18.03 21.89 25.75
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Looking at P/NAV multiples, note that Paramount’s peers trade at a median of 1.68x NAV, and a mean of 1.94x NAV while Paramount trades at 1.5x consensus and 1.23x our estimates. The following matrixes shows Paramount’s per share prices based on 1.4-2.0x NAV multiples, both net of and including recoverable reserves in Athabasca.
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NAV Valuation (Net of Oil Sands) 2005 2006 2007 2008
Net Asset Value: 22.78 24.83 29.73 34.64
Share Price @:
1.4 $31.89 $34.77 $41.62 $48.50
1.6 36.45 39.73 47.57 55.43
1.8 41.01 44.70 53.51 62.36
2.0 45.56 49.67 59.46 69.29
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NAV Valuation (Net of Oil Sands) 2005 2006 2007 2008
Net Asset Value Net of Oil Sands: 22.86 24.91 29.81 34.72
value of oil sands: 12.50 12.50 12.50 12.50
Total Net Asset Value: 35.36 37.41 42.31 47.22
Share Price @:
1.4 $49.50 $52.37 $59.23 $66.11
1.6 56.57 59.86 67.69 75.26
1.8 63.65 67.34 76.15 85.00
2.0 70.72 74.82 84.61 94.44
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Exhibit 4: Consolidated Valuation—What It’s Worth?
Fully valued, the price of Paramount should account for both its producing and non-producing assets. The following P/CF multiple analyses show the value of Paramount Resources at various commodity prices with an added value of $12.50/share for oil sands reserves and $4.29 for its remaining 2.89 million undeveloped acres.
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At 6.0x P/CF Multiple FY2005E FY2006E FY2007E FY2008E
Share Price when Corp.
Price (CAD$/Boe)=
50.00 $41.84 $43.07 $44.13 $44.72
53.00 43.92 45.41 46.50 47.13
56.00 46.01 47.75 48.87 49.54
59.00 48.09 50.09 51.24 51.95
62.00 50.17 52.43 53.61 54.35
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At 6.5x P/CF Multiple FY2005E FY2006E FY2007E FY2008E
Share Price when Corp.
Price (CAD$/Boe)=
50.00 43.93 45.25 46.40 47.05
53.00 46.18 47.79 48.97 49.66
56.00 48.44 50.33 51.54 52.27
59.00 50.70 52.87 54.11 54.88
62.00 52.95 55.40 56.68 57.49
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At 7x P/CF Multiple FY2005E FY2006E FY2007E FY2008E
Share Price when Corp.
Price (CAD$/Boe)=
50.00 46.02 47.44 48.68 49.38
53.00 48.45 50.18 51.45 52.19
56.00 50.87 52.91 54.22 55.00
59.00 53.30 55.64 56.98 57.81
62.00 55.73 58.37 59.75 60.62
Catalyst